Japan store chain Lawson scales back expansion plans in China

December 22, 2013 1:11 pm

Japan store chain Lawson scales back expansion plans in China

By Demetri Sevastopulo in Hong Kong

Lawson, the Japanese convenience store chain, is slowing its expansion in China because it thinks the Chinese government has not done enough to spur consumption in the world’s second-largest economy. Takeshi Niinami, Lawson’s chief executive, told the Financial Times that Lawson had decided to push back its plan to open 10,000 stores in China by 2020 to about 2025. It currently has 384 stores in the country.“The government of China should focus more on consumption . . . instead of investment,” said Mr Niinami in an interview.

Lawson would focus in China for now on the four big cities – Shanghai, Chongqing, Dalian and Beijing, where it already has fully owned stores – but eventually would look to open stores with local partners in three or four third-tier cities around the country, he said.

Mr Niinami said he had originally expected that rising wages in China would feed more quickly into higher consumption, instead of going into real estate.

China has included the goal of boosting private consumption in each of its past two five-year economic plans, but has made little progress. Izumi Devalier, an HSBC economist, says consumption as a percentage of gross domestic product has not grown significantly in recent years, averaging 35.4 per cent annually for the past five years.

Lawson has lost money in China for the past two years, which Mr Niinami blamed on factors including high rent and logistics costs and labour costs that are rising at about 13 per cent a year. In 2012, its Shanghai, Chongqing and Dalian stores produced a combined loss of $29.2m. It did not provide figures for its four Beijing stores.

Over half of our stores in China are actually generating profit,” said Mr Niinami, adding that he hoped to be profitable in China within five years.

But Mr Niinami sees big potential in south China – where Lawson’s main Japanese rival, FamilyMart, already has a presence – because of the large number of mom-and-pop stores that could become franchisees.

He added that recent food safety scandals in China had presented the company with an opportunity and that Lawson was trying to educate the central government about the value of its hygiene control systems. But he said officials were sometimes reluctant to engage because of the Sino-Japanese dispute over the Senkaku Islands, which Japan controls but China claims and calls the Diaoyu.

Mr Niinami said Lawson also was scaling back plans to enter India, having originally hoped to open 20-30 stores there by the end of 2012.

“Once we start, we can go easily [to] 1,000 to 2,000 stores because of density of population,” said Mr Niinami. “Political stability together with infrastructure will be attractive, but it is not now.”

Mr Niinami said he would instead focus on southeast Asia and was planning to open a regional headquarters in Thailand – where the retailer has 22 stores. That would act as a base for expansion in the region, including Myanmar, where Mr Niinami said Lawson hoped to have 700-800 stores within 10 years.

The convenience store chain’s overseas push comes as Japanese retailers increasingly try to develop markets overseas to counter slowing domestic growth.

Mr Niinami said Lawson wants to build a much bigger presence in Indonesia, where it has 63 stores, but faces hurdles including restrictions on imports and tough regulations on setting up franchises. He is keenly monitoring next year’s presidential election to determine the prospects for deregulation in the world’s fourth most populous nation.

Lawson’s focus on southeast Asia comes as Japanese investment in the region picks up. Ms Devalier said Japanese foreign direct investment into Asean was Y1.44tn (US$14bn) in the first 10 months of this year, almost double the amount of Japanese FDI in China in the same period.

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‘Smart people’ needed to resolve Senkaku dispute

Takeshi Niinami was speaking on the sidelines of the Fung Institute Asia-Global Dialogue as tensions between China and Japan escalated over the Senkaku. Just days before, China had declared an air defence zone over the area that angered Japan.

Maybe as Deng Xiaoping mentioned, the problem should be solved by the smart people of the future generation. A lot of business people in Japan support that idea

– Takeshi Niinami

Sino-Japanese relations have been tense since Japan bought three of the islands from their private owner in September 2012, sparking anti-Japanese riots across China. Mr Niinami said the latest tensions had not hurt Japanese business in China, but that it was essential for Tokyo and Beijing to resolve the issue.

“I hope that this will be resolved sooner or later. Both countries, but especially China, should know that this doesn’t create any benefit for either country.”

Mr Niinami said the Japanese business community blamed Shintaro Ishihara, the former rightwing governor of Tokyo, for the Sino-Japanese tensions. The Japanese government insists it only bought the islands to pre-empt a similar move by Mr Ishihara.

“The root cause is Shintaro Ishihara’s words. Before then we had strong momentum to explore the relationship between the two countries,” said Mr Niinami.

“Maybe as Deng Xiaoping mentioned, the problem should be solved by the smart people of the future generation,” he added. “A lot of business people in Japan support that idea. Though [Japanese] people think that the Senkaku Islands are Japanese territory from the history, we have to be practical to do business together.”